You’re trying to determine whether or not to expand your business by building a

Question

You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $17.4 million, which will be depreciated straight-line to zero over its four-year life.

Required:

If the plant has projected net income of $1,755,000, $2,115,000, $1,974,000, and $1,296,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Accounting rate of return = (average income over the years)/ Average investment

=(17755000+2115000+1974000+1296000)/4=1,785,000

ARR=1,785,000//(17.4*10^6/2))=20.52%

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